How Much Should You Set Aside for Taxes When You're Self-Employed?

When you had a regular job, taxes happened quietly in the background. Every paycheck showed up already shrunk, and your employer sent the difference to the government for you. The day you go out on your own, that job becomes yours. No one is withholding anything, so the money the IRS expects is sitting in your account looking exactly like spendable income. The fix is simple: set a chunk aside every time you get paid, before you can talk yourself into spending it.

The quick rule of thumb

Set aside 25 to 30 percent of your net profit, meaning what is left after business expenses, not your total revenue. If you are in a higher bracket or live in a state with its own income tax, push that toward 30 to 35 percent. It is a starting point, not a precise calculation, but it keeps the vast majority of freelancers out of trouble. The people who get burned are almost always the ones who set aside nothing and treat the whole deposit as theirs.

What you are actually saving for

There are three taxes hiding inside that percentage:

• Federal income tax, which runs on brackets, so the rate climbs as your income does
• Self-employment tax, a flat 15.3 percent that covers Social Security and Medicare
• State income tax, if your state has one, which varies a lot

That self-employment piece is the one that shocks people. As an employee you split it with your employer. On your own, you pay both halves yourself, on top of regular income tax. We break down exactly how it is calculated in our guide to self-employment tax. A couple of things soften the blow: half of your self-employment tax is deductible, and the qualified business income deduction can knock 20 percent off the income-tax portion for many people. Neither makes the bill disappear, which is why setting money aside still matters.

The IRS wants it four times a year

Here is the part that catches first-year freelancers. The government does not want one big payment in April. If you expect to owe 1,000 dollars or more, it wants estimated payments four times a year. Miss them and you can owe an underpayment penalty even if you pay every dollar by the deadline. Setting money aside as you earn it is what makes those quarterly payments a non-event instead of a panic. We walk through the dates and amounts in our guide to quarterly estimated taxes.

There is also a safety net called safe harbor. Generally, if you pay in at least 90 percent of this year's tax or 100 percent of last year's, you dodge the penalty even if you end up owing more. Last year's number is the easy target because you already know it, though it rises to 110 percent if your prior income was high.

How Vuuv helps

The hardest part of setting money aside is knowing what your actual profit is, and that is exactly what Vuuv does for freelancers. It keeps your income and expenses current so your net profit is never a mystery, which means the percentage you set aside is based on a real number instead of a hopeful guess. When a quarterly deadline rolls around, you already know roughly what you owe and the money is already waiting.

This article is general information, not tax advice. Tax rules change and every situation is different. Confirm the details against current IRS guidance or talk to a qualified tax professional before you file.